Option Activity Alert: IMAX, HIG, VRGY, TOL, WM

IMAX – Imax Corp. – Earlier today you’d have needed more than just 3D-glasses to see the trail left behind by a near 20% surge in shares of the movie-theater corporation. Rumors have emerged that Japan’s Sony Corporation is set to make a $40-plus bid for the company enamored by its growing popularity amongst movie theater-goers. With more films built using 3D-technology shares in the company had already tripled this year in anticipation of growing revenues. Earlier in the week we witnessed what appeared to be a delta-neutral strategy that would have benefitted perfectly from the surging share price, which has subsequently halved its intraday gain. An investor sold stock at around $25.00 and bought call options at the $30 strike expiring in March. As the shares jump in value, the delta on the option swells to give the investor a far-greater long exposure to the stock hugely eclipsing losses from the short position. But is looks like this trader is sitting pretty today as developments unfold and there is no action at that strike price. Rather investors appear to be more concerned with an imminent Sony bid and have targeted the January expiration $35 strike, which has traded in a range spanning 40-cents to $1.10 per contract as the share price digests today’s news. Trading currently at 60-cents the contract would make money by expiration only if shares in Imax surged by more than 18.6% based upon a share price at $30.00.

HIG – Hartford Financial Services Group. – Earlier in the month it appears that an options trader took to a bullish call strategy on the multi-line insurer. December 8 was a high volume day for the stock but also saw around 7,500 calls expiring in January 2011 trade at a 55-cent premium. The strike price of $27.50 was above the closing share price that day by exactly 10%. Just nine days ago the share price hit home lifting the premium to 90-cents. Since then and despite a still-bubbly environment for equities Hartford has lost its mojo and drifted back to $26.30. Today we note a sizeable 10,000 lot trade in evidence that continues to display bullishness on the stock. The premium today of 35-cents indicates this trader continues to believe that 2011 might deliver better things for Hartford. Traders also established a fresh 5,000 lot position for a $1.10 premium in the February contract at the $27.00 strike.

VRGY – Verigy, Ltd. – We noted yesterday a plain-vanilla call spread costing a 60-cent premium as investors speculate on a possible takeover deal that would potentially value Verigy at $15.00 or beyond. The company manufactures advanced test systems and solutions for the semiconductor industry and with shares stalling today at $13.19 one investor at least feels confident that the shares will clear the upper strike involved in the $13/$14 call spread before expiration in January. This investor bought 8,000 call spreads today at around 60-cents, which means that he’ll clear the remaining 40-cents only if the shares continue to move ahead above $14.00.

TOL – Toll Brothers Inc. – Shares in the homebuilder have been on a steady incline since September despite the underlying woes in the housing market. Last week the share price reached $20.00 apiece for the first time in six months. Indeed TOL’s weakest share price since the Fed hinted in September that it would further stimulate the economy came November 23 at $17.35 before rallying again. In options activity today it appears one trade used a 5,000 combination strategy to bank on a revisit to its recent peak before options expire in March. The trader sold both calls and puts at the $20 strike reaping a gross premium of $2.30 per contract and is perhaps taking advantage of the recent pop-higher for implied volatility as shares pared gains. The investor is probably stating through this straddle combination that the outlook is somewhat better for builders, but probably not sufficient to drive TOL’s shares above the recent high-water mark from today’s price at $19.13. The trade loses money on a breakeven basis outside the range spanning $17.70 and $22.30. Maximum gains occur should shares settle at exactly $20.00 on expiration day.

WM – Waste Management Inc. – Bulls pushed up options implied volatility at Waste Management today by just 10% to 15.5% as they snapped up call options expiring in April. Earnings are due in mid-February and it appears that sporadic call buying today by investors is in anticipation that there may be good news in store. Shares in Waste Management initially rose in conjunction with demand for calls to reach the highest point since October 22. Investors established fresh positions in the April $36 and $37 strike calls and based upon respective premiums of $1.75 and $1.25 imply a new 52-week high for the company in the New Year. Surprising is the demand for the lower strike calls here as they are in-the-money with shares standing at $36.77.

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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